Oil profits are not outsized. They are taking around a 10% profit on their revenue. That’s about what most small businesses make. Why begrudge them? For years and years their profit margin was way lower than that.
The Australian has a great article on the subject:
SOMETHING weird happened yesterday in Washington, capital of the land of capitalism.
Oil industry executives were called before the US Senate for a public flogging. They were forced to defend their massive profits. They were asked to fund government programs. There was even talk of price controls.
Pete Domenici, chairman of the Senate energy committee, said there was a “growing suspicion oil companies are taking unfair advantage” and insisted the executives “owe the American people an explanation”.
What transpired was a lesson in Economics and Capitalism 101. If any politicians should know the business rules, you’d think it would be in the home of private enterprise. It’s not as if this were a seminar for the Australian Democrats or the Greens.
But the chiefs of the biggest oil companies in the world helped expose what the show at the grand Dirksen Room of the Senate was all about – populist politics.
…
The numbers are big – that’s the oil industry. But the profit margins are not that spectacular from a business perspective. For each dollar of revenue made, banks and pharmaceutical companies, among others, are more profitable. Of the Fortune 500 companies in the US, Exxon’s gross profit margin last year puts it at number 127.
Furthermore, gas in the U.S. is still incredibly cheap by world standards:
There was no rush, for example, to point out that petrol prices in the US are still cheap by OECD standards. If you filled your tank up around the corner from the Senate yesterday, you paid just 88c a litre – about 30per cent cheaper than the price of petrol in metropolitan areas around Australia.
It’s all playing for the cameras:
The song and dance in the Senate was on the old stomping ground of attacking Big Oil. Forget the reality of the marketplace – the surging demand from China and India, and the recent hurricanes in the US that knocked out a third of the oil industry’s refining capacity. What was needed was someone to blame.
The oil companies need these profits to finance projects that won’t bear profits for decades:
“In politics, time is measured in two, four or six years, based on the election cycle. In the energy industry, time is measured in decades, based on the life cycles of our projects.”
ExxonMobil had just announced the first oil and gas production from its Sakhalin-1 Project in Russia’s far east, he said. “We began work on the project over 10 years ago, when prices were very low, and we expect it to produce for over 40 years … that’s more then 50 years for one project. Fifty years is 25 congresses and 12 presidential terms. Fifty years ago, Dwight Eisenhower was president of the US.”
Furthermore, last time politicians tried to mess with it, it was a disaster:
He warned that short-term policy fixes for oil industry problems were a recipe for disaster, highlighting Washington’s response to the 1970s oil crisis.
“First price control, then punitive taxes were tried to manage petroleum markets. They contributed to record prices, shortages and gasoline lines. As the government withdrew from attempting to manage the markets, prices began to come down.”
12 Responses
November 11th, 2005 at 8:43 am
It still needs to be said that the oil companies line the pockets of politicians, much like unions, ecology watchdogs, telecommuncitaions, arilines and other lobby groups do. Indeed, according to the Washington Post, the veractiy of questioning the oil executives got was almost inverse to the amount they poured into a given Senator’s pocket, uhm, campaign, e.g. these excerpts from a Dana Milbank article yesterday
November 11th, 2005 at 8:52 am
Lol… That’s a funny story all around.
November 11th, 2005 at 9:02 am
Did you see that ANWAR drilling was dropped from the budget bill yesterday?
So basically congress is saying to the oil companies: “No you can’t drill for oil. So anyway why are gas prices so high?”
On the bright side though gas prices, at least in Richmond have gone down significantly over the past couple of weeks.
November 11th, 2005 at 9:03 am
Yeah, I did. I was ticked!
November 11th, 2005 at 11:17 am
I find myself partially agreeing, partially disagreeing w/ expressed sentiments. Yes, the “gouging” hearings do seem to be mostly pointless grandstanding. Regarding ANWR drilling, though, I was pleasantly surprised to see it shot down–partly from a wildlife/relatively-virgin-territory standpoint (I’ll admit up-front that I haven’t researched the issue in depth), and partly because I don’t see high gas prices as a bad thing. Drilling in the ANWR seems to be, at best, a way to prolong an obsolete energy paradigm when we should be investing in development of alternate sources.
November 11th, 2005 at 4:49 pm
ANWAR drilling, along with refinery expansion and increased offshore drilling are steps toward not being dependant on the middle east for oil. Basically the Middle East has us by the short hairs because our oil consumption is so high. However the environmentalists in this country have kept us from taking the steps listed above because they claim it would damage the environment. Claims that cannot be substantiated and the technology has outgrown the current laws. So this wouldn’t fix high gas prices, but it would make it so we weren’t so beholden foreign oil.
November 11th, 2005 at 6:15 pm
It looks as though the “expected”* recoverable amount (per the USGS) is 10.4 billion barrels, or under a year and a half’s supply at 20 million barrels/day. Technically recoverable oil is 4.3 billion barrels, or about 7 months’ worth. Sure, we could temporarily reduce our imports of Mideast/Venezuelan/etc. oil if we drilled in the ANWR. In the long run, though, this is as likely to solve our dependence on foreign oil as is a 1-day gasoline boycott. This reminds me of the cliched proverb of giving a man a fish vs. teaching him to fish. The only way that we can regain energy independence in the long term is to develop technologies that aren’t as quickly exhausted* as oil. We do have clear paths of technology and policy available: pebble-bed nukes, solar (PV or thermal, centralized or decentralized), wind, and a host of other possibilities. Delaying research into replacements for oil as an energy source does nothing for our national security. China, though they’re aggressively making political and economic alliances to secure oil rights (in competition, of course, with the biggest oil consumer state–the U.S.), is already ahead of us in the pebble-bed game. The longer we wait to begin aggressively pursuing technology to eliminate or drastically reduce our fossil-fuel dependence, the more rapidly our ability to compete internationally will decline.
So…whatever one may believe about:
- environmental-damage arguments against drilling in the ANWR
- in general, the environmental effects of burning fossil fuel
these arguments really aren’t even necessary. Approaching drilling in the ANWR solely from a national-security perspective, it looks as though it’s somewhere around #13 on the top-10 list of ways to improve America’s energy security.
*expected amount = sum of possible quantities times the probabilities of each quantity being found. I assume that the “mean” amount reported in the article is this number.
*exhaustion = the point where extraction of remaining quantities isn’t economically viable
November 12th, 2005 at 3:23 pm
While I agree with you, Jerminator, that we should drill ANWR, please realize that atthecrux is not an envirowacko. His motivations are not so much environmental as sustainability.
He has put his money where his mouth is and has invested (successfully) in renewable energy companies.
November 12th, 2005 at 3:53 pm
I’m a bit torn on this whole energy thing myself. On the one hand, you have oil conglorporations (my homemade smush-together of conglomerations and corporations.) that are indeed profiteering during a time of crisis; they could easily “do something” to alleviate some of the pricing woes. They don’t have to, and they shouldn’t get all of the blame for the situation. U.S. citizens as consumers of energy deserve a non-trivial chunk of blame in this energy crisis; we use more energy to keep homes and businesses operating at current comfort levels; our votes planted in the last few crops of politicians getting fertilized by these same conglorporations.
We as a nation tend to get fixated on one and only one solution. Those days should be considered done and over with. Drilling a new oilfield alone isn’t an answer. Relaxing regulations alone isn’t an answer. Solar energy alone isn’t an answer. Hybrid vehicles alone aren’t an answer. A mix of solutions is the best to go, to whit:
These are just some ideas I’ve been thinking about. My point is that a silver bullet won’t be found for this or any other serious problem, like water usage, in the near future. The era of searching for panaceas should be over and done with, and this is a perfect problem to show how creative and innovative we can really be.
November 12th, 2005 at 6:06 pm
To elaborate on Hans’s clarification, I do consider myself an encironmentalist, but he’s probably right in saying that I’m not an “envirowacko.” Specifically, I believe that nature does have intrinsic value, but that human need for natural resources does outweigh nature’s “right” to exist undisturbed. In this balance, we have the right to consume, and the obligation to do so responsibly. Many times, I believe that we ignore this second fact to our long-term detriment.
FWIW, I derive this environmental philosophy partly from the creation story of Genesis. In that story, God went six days before creating people, but looked at what he’d made each day, and said “it’s good!” Later, humans’ duties and privileges in the Garden of Eden were to “to work it and take care of it,” and to eat from any tree (except the one, of course) in the garden. I’m not bringing this up to debate the literal veracity of the Genesis creation account, but simply to provide background.
November 12th, 2005 at 6:21 pm
BTW, that “to our long-term detriment” above does go w/ what Hans said about sustainability–the pragmatic, self-interested side of environmental responsibility.
November 12th, 2005 at 6:31 pm
Stikkbomber, you have a good point regarding absence of panaceas. Even within your post, the juxtaposition of corn biodiesel production as part of an energy solution with the problem of water consumption provides an illustration: “solving” one problem may exacerbate another, but that should never stop us from exploring creative solutions to the problems du jour.
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